On October 23, 2018, the staff of the SEC’s Division of Corporation Finance (the Division Staff) issued Staff Legal Bulletin No. 14J (CF) (SLB No. 14J), which provides additional guidance on the excludability of shareholder proposals under Exchange Act Rule 14a-8. SLB No. 14J clarifies and expands upon the guidance provided by the Division Staff last fall in Staff Legal Bulletin No. 14I (CF) (SLB No. 14I). The new guidance sets forth a helpful roadmap for drafting the discussion of the board’s analysis in no-action requests under Rule 14a-8(i)(5) and Rule 14a-8(i)(7) and should expand the number of shareholder proposals that may be excludable under Rule 14a-8(i)(7).

Heightened Expectations for Discussion of Board Analysis Included in a No-Action Request Relying on the “Economic Relevance” or “Ordinary Business” Exception A company may exclude a proposal under Rule 14a-8(i)(5) (the “economic relevance” exception) if it relates to operations which account for less than 5% of the company’s total assets, net earnings and gross sales and “is not otherwise significantly related to the company’s business.” A company may exclude a proposal under Rule 14a-8(i)(7) (the “ordinary business” exception) if it “deals with a matter relating to the company’s ordinary business operations.” However, the Division Staff will not permit a company to exclude a proposal if it transcends the company’s day-to-day business matters by raising a policy issue so significant that it would be appropriate for a shareholder vote.

The Division Staff is of the view that the company’s board is generally in a better position than the staff to make determinations about the significance of a policy issue given the board’s fiduciary duties and knowledge of the company’s business. Therefore, last year with the issuance of SLB No. 14I, the Division Staff encouraged companies to include in no-action requests under Rule 14a-8(i)(5) and Rule 14a-8(i)(7) a well-developed discussion of the board’s analysis of the policy issue raised by the proposal and its significance to the company and its business, if the significance is at issue.

In SLB No. 14J, the Division Staff noted that the “most helpful” discussions in no-action requests “focused on the board’s analysis and the specific substantive factors the board considered in arriving at its conclusion” that a policy issue is not otherwise significantly related to the company’s business (for Rule 14a-8(i)(5)) or is not sufficiently significant in relation to the company (for Rule 14a-8(i)(7)). The Division Staff proposed the following non-exhaustive list of factors that may be included in the board’s analysis:

  • The extent to which the proposal relates to the company’s core business activities.
  • Quantitative data, including financial statement impact, related to the matter that illustrate whether or not a matter is significant to the company.
  • Whether the company has already addressed the issue in some manner, including the difference between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the difference presents a significant policy issue for the company.
  • The extent of shareholder engagement on the issue and the level of shareholder interest expressed through that engagement.
  • Whether anyone other than the proponent has requested the type of action or information sought by the proposal.
  • Whether the company’s shareholders have previously voted on the matter and the board’s views as to the related voting results.

While it is not necessary for the board’s analysis to cover all of the factors listed above, going forward the Division Staff expects a well-developed discussion of the board’s analysis to address any previous shareholder voting results related to the subject matter of the proposal. In the view of the Division Staff, a vote that was taken recently and received “significant” (not defined) shareholder support suggests that the topic is more likely to be significant to the company and its business. The Division Staff will also consider subsequent company actions or intervening events since the last shareholder vote that may have mitigated – or increased – the significance of the issue to the company.  SLB No. 14J makes clear that the submission of a board analysis is voluntary and that the absence of a board analysis will not create a presumption against exclusion (and vice versa). However, the Division Staff noted that “without having the benefit of the board’s views on the matters raised, the staff may find it difficult in some instances to agree that a proposal may be excluded.”

Finally, the Division Staff reminded that:

  • They will also consider the proponent’s analysis of the issue.
  • A proposal that they agree is excludable for one company may not be excludable for another.
  • They generally view substantive governance matters to be significant to almost all companies and therefore not excludable.

Micromanagement as a Basis for Exclusion Under the “Ordinary Business” Exception Two key considerations underlie the “ordinary business” exception: (1) the subject matter of the proposal and (2) the extent to which the proposal seeks to micromanage the company “by probing too deeply into matters of a complex nature which shareholders, as a group, would not be in a position to make an informed judgment.” A proposal may be excludable on the basis of micromanagement if it “involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.”

SLB No. 14J clarifies that a proposal seeking an intricately detailed study or report may be excludable on the basis of micromanagement if the underlying substance of the report relates to the imposition or assumption of specific timeframes or methods for implementing complex policies.

Exclusion on the basis of micromanagement may stem from “the manner in which a proposal seeks to address an issue” and does not necessarily mean that the subject matter raised by the proposal is improper for purposes of Rule 14a-8.

How the “Ordinary Business” Exception Applies to Proposals Relating to Senior Executive and/or Director Compensation Under the “ordinary business” exception, proposals relating to general employee compensation and benefits are excludable whereas proposals focusing on significant aspects of senior executive and/or director compensation generally are not excludable.  When evaluating proposals that raise both ordinary business and senior executive and/or director compensation matters, the Division Staff scrutinizes whether the focus of the proposal is actually an ordinary business matter or aspects of senior executive and/or director compensation. To ensure that “form is not elevated over substance,” SLB No. 14J clarifies that a proposal may be excludable under Rule 14a-8(i)(7) if the focus of the proposal is an ordinary business matter even if the proposal is related to senior executive and/or director compensation matters or framed as a senior executive and/or director compensation proposal.

Proposals relating to general employee compensation and benefits are excludable on “ordinary business” grounds on the theory that broadly available compensation does not generally raise significant compensation issues that transcend ordinary business matters. In SLB No. 14J, the Division Staff set forth its new approach to evaluating proposals that address aspects of senior executive and/or director compensation that are also available or applicable to the company’s general workforce:

  • Companies may generally rely on Rule 14a-8(i)(7) to exclude proposals focused on aspects of compensation that are available or applicable to senior executive officers, directors and the general workforce.
  • Companies may generally not rely on Rule 14a-8(i)(7) to exclude proposals focused on aspects of compensation that are available or applicable only to senior executive officers and/or directors.

In the past, the Division Staff has not allowed companies to exclude proposals relating to senior executive and/or director compensation on the basis of micromanagement. Under SLB No. 14J, the Division Staff will now treat such proposals consistently with other types of proposals. Therefore, the Division Staff may agree that proposals addressing senior executive and/or director compensation that seek intricate detail, or seek to impose specific timeframes or methods for implementing complex policies may be excluded under Rule 14a-8(i)(7) on the basis of micromanagement.